Earnings Call Transcript - FHN Q1 2024

Operator, Operator

Welcome to the First Horizon First Quarter 2024 Earnings Conference Call. My name is Carla and I will be coordinating your call today. I will now hand you over to your host, Natalie Flanders, Head of Investor Relations to begin. Natalie, please go ahead.

Natalie Flanders, Head of Investor Relations

Thank you, Carla. Good morning. Welcome to our first quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks, and then we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Susan Springfield, here to assist with questions as well. Our remarks today will reference our earnings presentation, which is available on our website. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties, and therefore, we ask you to review the factors that may cause our results to differ from our expectations. Additionally, please be aware that our comments will refer to adjusted results which exclude the impact of notable items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release. And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them. And with that, I'll turn things over to Bryan.

Bryan Jordan, Chairman, President and CEO

Thank you, Natalie. Good morning, everyone, and thank you for joining our call. The first quarter of 2024 was another strong quarter for First Horizon, demonstrating our ability to produce consistent returns for our shareholders. We grew revenue both through expanding our margin and improvement in our countercyclical businesses, while simultaneously reducing expenses and maintaining strong credit performance. In March, we celebrated our 160th year in business and took the opportunity to celebrate the strength and resiliency of our company, which has been driven by a dedicated and talented associate base. In honor of our 160th anniversary, we recently announced our Grants for Good Campaign, which will award $1.6 million in grants to non-profit organizations within our 12-state footprint. We believe that the communities where we do business are the foundation of First Horizon's long record of success and we are proud to continue to support the clients and communities in our markets. On Slide 5, we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of $0.35 per share, up 9% from the prior quarter with pre-provisioned net revenue up $25 million. Adjusted return on tangible common equity improved to 11.6%, driven by positive operating leverage, as well as the benefit of returning excess capital to shareholders. Our improved returns resulted from our ability to drive higher revenue in both our core banking franchise and our countercyclical businesses. We grew the net interest margin 10 basis points from the fourth quarter from improved pricing on both loans and deposits, driving a $7 million increase in net interest income. FHN Financial had a stronger quarter as well with a $15 million increase in fixed-income fees. In January, our Board approved a $650 million share repurchase authorization. We began to return capital to shareholders this quarter, repurchasing over $150 million of stock, ending the quarter with a common equity Tier 1 ratio of 11.3%. We will continue to opportunistically deploy capital above our 11% near-term target. As I look forward to the rest of 2024, I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter-after-quarter, while serving our customers and communities just as we have over the past 160 years. We have an attractive footprint, a competitive product set, and a strong credit culture that will allow us to profitably navigate the ever-changing economic outlook of the upcoming year.

Hope Dmuchowski, Chief Financial Officer

Thank you, Bryan. Good morning. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated pre-provision net revenue of $323 million, up $25 million from the prior quarter. Net interest income increased $7 million from the fourth quarter, driven by improvements in both deposit and loan pricing, which expanded the margin by 10 basis points. Fees excluding deferred compensation were up $13 million from last quarter, driven by higher revenues from our fixed-income business which saw a 58% increase in ADR. Expenses excluding deferred compensation were down $4 million linked quarter, driven by a significant reduction to outside services. This was partially offset by personnel increases for annual merit, seasonal benefits, and revenue-driven incentives within our fixed-income business. Expenses remain a lever that we are able to pull to drive increased profitability. We continue to identify and implement operational efficiencies across our bank that will help us offset the increase of our strategic investments to drive enhanced shareholder returns. Provision expense was $50 million this quarter, resulting in a stable ACL coverage ratio of 1.4%. Our strong performance improved return on tangible common equity by 60 basis points. On Slide 7, we outline notable items in the quarter, which reduced results by $0.02 per share. First-quarter notable items include an incremental expense of $10 million for the FDIC, a Special Assessment, and $5 million of restructuring expenses associated with personnel initiatives as we remain focused on finding operational efficiencies. We also noted an upcoming event in the second quarter. On April 1st, First Horizon provided notice that it would redeem all outstanding shares of the Series D preferred stock on May 1st. The Series D shares were acquired during the Iberia merger of Equals and do not qualify for capital treatment as the first call date was within a five-year window. On Slide 8, you will see that the margin expanded 10 basis points from the prior quarter to 3.37%, improving NII by $7 million. First-quarter benefited from a full quarter of repricing on the promotional deposits gathered in 2023, with interest-bearing deposit costs declining 9 basis points from the prior quarter. Loan yields also expanded 9 basis points from the benefit of wider spreads on new and renewing loans, as well as the ability to redeploy lower-yielding fixed-rate cash flows. Period-end deposits are flat quarter-to-quarter with a 5 basis point reduction to the total deposit rate and a 9 basis point reduction to the interest-bearing rate paid. We continue to see strong retention on the promotional deposits repriced last quarter with about 90% retention on both the number of clients and the balances. We had a modest increase in brokered balances as contracts initiated in 2023 funded up ahead of approximately $800 million of brokered CDs maturing in the second quarter. Though we continue to see some rotation out of non-interest bearing during January, balances were relatively flat since February. On Slide 10, you can see that our countercyclical businesses had a relatively strong quarter. Average daily revenue in our fixed-income business increased $268,000 from the fourth quarter, contributing an additional $15 million of fee income. The rebound this quarter was driven by improving liquidity conditions in the banking sector and the market's expectation that short-term rates have peaked and are likely headed lower. Though the recent inflation numbers have reduced the prospect of rate cuts, we expect business will remain solid, though not as strong as first quarter levels. Mortgage revenue also increased by $4 million, primarily due to higher volumes. Service charges and fees decreased $2 million due to seasonality and overdraft fees. Card and digital banking fees rebounded $3 million as fourth quarter included a non-recurring impact from an accounting methodology adjustment on interchange rebates. Lastly, our non-interest income declined $6 million, mostly due to lower FHLB dividends, as well as a modest reduction in letter of credit and swap fees. I'll cover asset quality reserves on Slide 13. Loan loss provision was $50 million this quarter, flat to the prior quarter. Net charge-offs were $40 million or 27 basis points. Our largest charge-off this quarter was a $9 million C&I loan to a consumer goods company for which we were already fully reserved. We have remained disciplined in underwriting and our approach to client selection. While we have seen some additional negative grade migration in the first quarter, overall, we continue to see stable credit performance across markets and industries. On Slide 14, you can see that we have maintained strong capital levels while successfully deploying capital to shareholders through the repurchase of almost 11 million shares, utilizing approximately $150 million of our $650 million share repurchase authority. Share repurchases drove a 9 basis point reduction in capital this quarter, while CET1 remains very strong at 11.3%. First quarter tangible book value per share increased to $12.16, benefiting from $0.35 of net income, offset by $0.15 of dividends, $0.15 from higher mark to market impact, and $0.04 of share buybacks. We continue to expect our full-year NII growth to fall within the 1% to 4% range that we originally outlined. We have updated our assumptions for interest rates to reflect the forward curve for March, which includes cuts in June, September, and November. Though the market's expectations have continued to evolve over the last few weeks, we do not believe that it will have a material impact on our outlook. I will wrap up on Slide 16, which drives home that we are focused on maximizing shareholder value. First quarter was a great start to 2024 and I believe this is the beginning of a strong year for First Horizon. We expect to deliver better revenue performance than we laid out in our original guidance while finding operational efficiencies to maintain our expense guidance.

Bryan Jordan, Chairman, President and CEO

Thank you, Hope. Our first quarter results reflect the strength of our franchise and the ability to improve profitability in an extremely competitive industry. As Hope mentioned, our teams have made great progress over the last year on our strategic investments, which will allow our associates to serve our clients more quickly and efficiently. My expectation is that the next few months for the economy will look similar to the first quarter, which gives me tremendous confidence in our ability to generate strong returns for our shareholders throughout the rest of the year. Finally, I want to touch on the announcement we made Monday that our Chief Credit Officer, Susan Springfield, has decided to retire later this year. We have named Tom Hung as her successor. Susan's decision to retire is bittersweet and she will be greatly missed. She has been with the company for nearly 30 years. We are incredibly grateful for her steadfast leadership and her unwavering devotion to our team and our clients. Thank you, Susan. Carla, we can now open it up for questions.

Operator, Operator

Our first question comes from Ebrahim Poonawala from Bank of America. Your line is open.

Ebrahim Poonawala, Analyst

Hi, good morning.

Bryan Jordan, Chairman, President and CEO

Good morning, Ebrahim.

Ebrahim Poonawala, Analyst

Hi, Bryan. How are you? I guess, maybe just first question for Hope around NII outlook. In the past, Hope you provided spot rates and deposit costs. Just give us, if you don't mind, if you can drill down into what the spot rate was at the end of 1Q and how we should think about that drifting higher, I'm assuming if we don't get much in terms of rate cuts for the rest of the year.

Hope Dmuchowski, Chief Financial Officer

Thanks, Ebrahim. Good to hear from you this morning. Our spot rate at the end of the quarter was slightly up on interest-bearing and total deposits, but on average kind of flat. Well, some of it is mixed, some of its timing. So I really want to focus on what was our overall deposit costs for the quarter. Our betas went from a peak of 63 down to 60. We continue to have momentum in retaining the balances and repricing them. We're probably at the bottom of being able to reprice those promotional deposits and we are seeing increased competition. As you mentioned, the longer it takes us to get that first-rate cut, the harder I think it's going to be to continue to drive deposit costs down meaningfully.

Ebrahim Poonawala, Analyst

Got it. Thanks for taking my questions.

Bryan Jordan, Chairman, President and CEO

Thank you.

Michael Rose, Analyst

Hi, good morning, everyone. Thanks for taking my questions. I think, in the prepared remarks, you mentioned that loan yields have the potential to move higher just as cash flows continue to mature. Can you just give us a sense for what the magnitude of that could be? And Bryan, if you can just generally comment on loan demand in some of your markets at this point.

Hope Dmuchowski, Chief Financial Officer

Thanks, Michael. As I mentioned in my prepared comments, yes, we do have a fair amount of cash flow coming in that we will be able to redeploy. From a loan growth perspective, we're forecasting kind of flat to maybe slightly up.

Bryan Jordan, Chairman, President and CEO

Michael, I'll pick up on loan demand. Loan demand is okay. It's not great. It really is in pockets that you see real strength. As you mentioned, we do have the benefit of some fund up on some existing relationships, and you started to see the tick-up in seasonality in our mortgage warehouse lending business. But overall, we're still seeing good opportunities. We're still being very selective about how and where we participate, particularly on price and structure. But I expect that the loan demand is likely to remain somewhat more modest, broadly speaking, in the economy, simply because we're in that space between rates not going up anymore and rates not coming down. And I think people are still a little bit cautious and it's going to take a little bit more certainty about when the Fed is going to move.

Michael Rose, Analyst

That's great color. And maybe just as my follow-up, maybe one for Susan, and congratulations on your upcoming retirement.

Susan Springfield, Chief Credit Officer

Sure. Thanks. And thanks, Michael, for the nice comments. As it relates to new non-performing, we saw non-performing go up about $43 million. And that's there were a few new non-performing loans. That increase was largely driven by two credits. One was a senior living facility, a senior living, assisted living memory care facility, and the other was a consumer finance company. We also had $12 million of partial charge-downs on three commercial real estate loans based on updated appraisal values. The ACL coverage ratio remains stable at 1.40%. We provide additional detail in the appendix that gives some insight into the diversification and granularity of our loan portfolio. We have remained disciplined in underwriting and our approach to client selection. While we have seen some additional negative grade migration in the first quarter, overall, we continue to see stable credit performance across markets and industries.

Hope Dmuchowski, Chief Financial Officer

In regards to the allowance process, I want to emphasize that we do not aim for a specific number. Instead, we engage in a disciplined process every quarter, evaluating various scenarios, including different economic outlooks. As you know, with CECL, CECL is considered a lifetime loss approach. So based on what we know today and what external economists and our own internal experts are saying, we believe this is the right reserve coverage based on several different outcomes that could emerge.

Bryan Jordan, Chairman, President and CEO

So we think loan demand will be fairly soft, but improve over the course of the year.

Hope Dmuchowski, Chief Financial Officer

As we look at where to redeploy, the mortgage warehouse is one of those that is a seasonal product for us and tends to fund up in Q2 and Q3. And it's our highest-yielding asset that we have. We continue to see on renewing business and new business, expanding margins anywhere from 150 basis points spread all the way up to 300 and some above 300 in our top businesses. We're looking for long-term growth.

Bryan Jordan, Chairman, President and CEO

Loan demand is okay. It's not great. It really is in pockets that you see real strength. You have some aspects of the Carolinas where loan demand has been very good, and you see other pockets where it is probably a bit softer. And as Susan mentioned earlier, we've had quite a bit of success working with clients. Overall, I think, we are in good shape. We have a strong franchise, and we continue to see good opportunities.

Susan Springfield, Chief Credit Officer

When we have loans that are non-cash that are handled in our special assets groups, there are situations where it might be in our best interest if we're the lead bank or the sole bank to work with them on modifications.

Bryan Jordan, Chairman, President and CEO

We remain committed to our clients, we want to support them through their challenges and opportunities. That partnership mentality is truly what guides us.

Operator, Operator

We currently have no further questions. I will hand back over to Bryan Jordan to conclude.

Bryan Jordan, Chairman, President and CEO

Thank you, Carla. Thank you everyone for joining the call this morning. We appreciate your time and appreciate your interest in our company. Please reach out if you have any further questions or if you need any additional information. We'll be happy to try to help. Hope everyone has a great day.

Operator, Operator

This concludes today's call. Thank you for joining. You may now disconnect your lines.